Pop quiz: What’s an ETF? If you said a basket of stocks (or in some cases, even a single stock) arranged under a single ticker — you’re right. But did you know that they can be more than that? Enter: option-based ETFs.
Option-based ETFs are an umbrella term for all of the ETFs that utilize options strategies on top of their holdings — typically to manage risk to the downside. These are for investors who don’t want (or feel the need) to get into the complexities of, for instance, how to sell covered calls, or when, or which ones to sell. Instead, they would prefer if another fund does it for them.
Here’s the thing: If you have the time, the patience, and the knowledge — these ETFs probably aren’t worth it. ETFs collect an investment management fee, AKA an expense ratio. This isn’t a fee you have to pay yourself — it’s taken from the net asset value (or the NAV) of the ETF — meaning the ETF had better perform well, or else it’s going to experience its own form of time-decay.
Still, option-based ETFs can be a great option for people who:
- Are too busy to manage an option portfolio on their own
- Are too inexperienced to know how or where to start (we can help you learn)
- Don’t have enough capital to sell covered calls on a diversified portfolio
For those specific investors, here are a few different option-based ETFs to consider for your portfolio.
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Covered Call ETF: JPMorgan Equity Premium Income ETF (JEPI)
JEPI has a large number of institutional holders, including Mercer Global Advisors and Requisite Capital Management. JEPI is an ETF that seeks to sell covered calls on a portfolio of large-cap stocks, actively managed by JPMorgan. Covered calls allow investors to collect option premium on their long-stock holdings at the cost of capping their potential gains. Covered calls are often favored during periods of high volatility. (Typically, higher volatility means higher-cost options.)
In addition, many of JEPI’s holdings offer a dividend, and the fund itself carries a 10% yield, making it an attractive option for investors looking for a way to ride out volatility. However, the fund’s expense ratio is 0.35% — nearly 4-times that of the SPDR S&P 500 ETF Trust (SPY) (which costs investors 0.09%).
JEPI Expense Ratio (Management Fee): 0.35%
- YTD: -8.85% (vs. SPX: -12.98%)
- 1 month: +1.47% (vs. SPX: +5.09%)
JEPI does exactly what it advertises — it’s a less volatile way to play large-cap stocks. You likely won’t get as much gain from the upswings, and in turn, those covered calls will save you from feeling the full pain of the downswings. However, JEPI doesn’t specifically use the stocks in the SPX. Investors looking for S&P 500, Nasdaq, or Russell 2000 ETFs that sell covered calls have these options to pick from:
- XYLD — Global X S&P 500 Covered Call ETF
- QYLD — Global X Nasdaq Covered Call ETF
- RYLD — Global X Russell 2000 Covered Call ETF
Long Put and Covered Call ETF: Core Alternative ETF (CCOR)
Covered calls aren’t the only option strategy that ETFs love to overlay — some combine the strategy with long puts, like the Core Alternative ETF (CCOR). It’s hard to find ETFs like this that actually give $SPY a run for its money, but CCOR fits the bill.
The idea is that in the event of a large downdraft in equities, the CCOR’s long-puts and short calls will provide a level of support for the ETFs price, and in the event of a truly catastrophic selloff, could even generate a positive gain for the fund. But if you thought JEPI was expensive, you’re not going to like the price tag on CCOR…
CCOR Expense Ratio (Management Fee): 1.07%
- YTD: +2.20% (vs. SPX: -12.98%)
- 1 month: +2.73% (vs. SPX: +5.09%)
At the end of the day, just like JEPI, CCOR is great for investors who don’t have the time, willingness, or capital to manage option hedges on their portfolio. If you invest in CCOR, you’re going to get a cookie-cutter, one-size fits all array of OTM long puts with between 6, 9, 12, and 15 months to expiration, worth roughly 50 basis points each. However, with a 1.07% expense ratio and mild outperformance relative to SPY, you’re likely better off buying your own puts rather than paying an ETF to do it for you.
Not sure how?
Start trading options for yourself. Try Rebel Weekly. We’ll tell you exactly where to enter and exit every time, with two actionable trade ideas designed to capture technical breakouts and breakdowns each week.
At Market Rebellion, we regularly incorporate put options into our trading services. Investors who are mostly long equities can use Market Rebellion’s bearish trade ideas as hedges to reduce their overall delta and provide a cushion to downside. However, for the more aggressive traders, Market Rebellion’s put option trade ideas can serve as outright bearish bets, seeking to profit on technical breakdowns using high-gamma, short-dated options.
CCOR’s top holdings, like Exxon (XOM) and Chevron (CVX) do not match the S&P 500. If you’re looking for an option-based ETF that overlays put options on top of holdings that do match the S&P 500, look to ETFs like:
- SPD — Simplify US Equity Plus Downside Convexity ETF (Long puts atop the S&P)
- PUTW — WisdomTree CBOE S&P 500 PutWrite Strategy ETF (Cash-secured puts atop the S&P)
Option-Based ETF Honorable Mention: Innovator Hedged TSLA Strategy ETF (TSLH)
Want to get really fancy? If you’re bullish on Tesla (TSLA), but looking for a way to put a floor on your potential losses (or to avoid the volatility), consider TSLH. TSLH is a fund that uses 10% of its equity to purchase 3-month-to-expiration vertical call debit spreads at a 1:1 risk/reward.
The other 90% of the fund is invested in treasury bills — a relatively stable and highly liquid asset. The idea is that the fund shouldn’t be able to lose, or gain, more than 10% on a quarterly basis. Tesla up or down 50%? TSLH should stop out at +/- 10%. That “should” lean on the consistent price of U.S. Treasury Bills.
TSLH Expense Ratio (Management Fee): 0.79%
- 1 month: +5.14% (vs. TSLA: +9.32%) — TSLH only began trading in late July, so additional data isn’t available.
Like the other option-based ETFs referenced above, TSLH is a great option for investors who are bullish on Tesla, but:
- Don’t have the capital for 3-month-to-expiration vertical spreads in the name
- Don’t have the time or knowledge required to actively manage options or option spreads
- Don’t want to be exposed to price moves in Tesla greater than 10%
If we’re starting to sound like a broken record, we get it. But we have to say it: You might be better off buying your own options — and we can teach you how. If you’re willing to put the time in, the juice is worth the squeeze. That said, if you truly don’t have the time or the capital, but want exposure to options, the above ETFs will trade them for you.